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What Is a PBX System?

Updated Oct 20, 2023

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A private branch exchange (PBX) is a business-grade telephone system. These types of systems offer the added functionality businesses need, such as the ability to offer employee extensions, and they provide automated attendants that answer and route calls to the proper people or departments. A PBX uses various communication channels, such as Voice over Internet Protocol (VoIP) and Integrated Services Digital Network (ISDN). 

A business phone system is different from residential or cell phone services because of its service offerings; such systems offer features like call conferencing, extension dialing, business-hour settings for routing off-hours calls, customer waiting queues, and hold music.

Key TakeawayKey takeaway

PBX, which stands for “private branch exchange,” allows businesses to manage multiple calls on a private telephone network.

How does a PBX system work?

What is a pbx

A PBX system is monitored using a switchboard, which processes the connections between telephones to facilitate a call. This system allows your business to provide multiple phone lines that are connected to a public switched telephone network or VoIP network, which is how calls are made and received.

PBX systems also control the numerous features business phone systems have. Besides allowing for communication with outside callers, a PBX system allows your business’s phone lines to be connected so employees can easily communicate with each other.

Types of PBX systems

There are three primary types of PBX systems: hosted, on-premises and SIP trunking.

  • Hosted: With a hosted PBX, your business phone will be based in the cloud. Setting up a hosted PBX system only requires signing up for the service and buying the actual phones. Setup takes a few minutes rather than several weeks, and cloud-hosting enables you to easily add or turn off certain additional features. Plus, since you’re the account manager, you have full control over your business phones.
  • On-premises: An on-premises PBX system can be a solid fit if you don’t expect your company to grow. That’s because the upfront cost of an on-premises system can be lower than the long-term cost of monthly payments for a hosted PBX system. Even the occasional maintenance fees to keep your network running shouldn’t add up to more than what monthly payments would cost. However, with an on-premises solution, you will be responsible for maintenance, which likely requires trained IT professionals to be on staff.
  • PBX SIP trunking: SIP trunking allows you to convert an existing landline PBX to a cloud-based phone system, lowering costs and expanding available features. These include tools like softphone apps and reporting analytics. 

Features of a hosted PBX

PBX features are what differentiate business phone systems from mobile apps or home phones. Here are some of the more valuable features.

  • Voicemail-to-email: In addition to traditional voicemail service, many PBX systems offer voicemail-to-email, which provides phone system users an audio file or transcript of the message left on their phone.
  • Auto-attendant: An automated attendant gives callers the option of pressing a specific number so their call is directed to the right person or department. For example, the attendant may say, “Press 1 for sales,” or “Press 2 for customer support.”
  • On-hold music: Rather than letting customers or clients wait in silence while they are on hold, PBX systems provide businesses with the option to play hold music. Some systems play preselected music or custom music selected by the business.
  • Paging: If an employee wants to send a message to the entire team, they can use the paging system to record a message via their telephone. The message can then be broadcast through a system of speakers to all employees, or sent to a select group of employee phones.
  • Presence: This feature allows employees to check whether their co-workers are available or on a call.
  • Call reports: These reports break down your company’s call data. They include information on your business’s phone usage, which can be further detailed by user or department.
  • Online management: This feature allows you to manage the phone system via an online portal. Administrators can add users, set phone numbers, review call reports, create ring groups, and see monthly statements. Employees log in to the portal to check their voicemail, view the company directory, and create call-forwarding routes.
  • Call forwarding: This allows your office phone to forward calls to another number when you don’t answer.
  • Call recording: This gives users the option to record their calls for playback at a later time.
  • Call queues: You can manage calls that come in simultaneously by placing them in a queue until someone is available to speak with them.
  • Extension dialing: Callers can plug in an employees’ extension to reach their direct line.
  • Ring groups: This allows businesses to put employees with similar roles into one group, which is helpful when customers are trying to reach someone within a certain department. For example, if you allow callers to press two for sales, the call will be forwarded to the employees in that ring group.
  • Call transfer: This option lets employees transfer calls to their co-workers.

Editor’s note: Looking for the right business phone system for your company? Fill out the below questionnaire to have our vendor partners contact you about your needs.


Because most PBX systems are now automated, they’re sometimes known as private automatic branch exchange (PABX) to differentiate them from PBX systems, which in the past required a live operator to make connections. Because that practice has fallen out of use, though, the term “PBX” typically implies that the system is automatic.

Key TakeawayKey takeaway

In the past, a PBX system required a live operator to make connections between PBX users and callers. This is no longer the case, as systems are now private automatic branch exchange systems. The PBX system is automatically programmed to make connections.

Analog PBX

Traditional analog PBX systems, often referred to as “landline systems,” are increasingly rare. They connect to the public switched telephone network (PSTN) over a plain old telephone service (POTS). This allows the system to join voice and fax calls via copper wiring. If you have an analog PBX system and wish to connect it to digital channels such as VoIP, you will need to use an adapter.

Key TakeawayKey takeaway

An analog PBX system uses the public switched telephone network to help users communicate.

Digital PBX

The most widely used type of business phone system is a digital or IP PBX system, which sends voice and video communications via the internet. 

You can choose a traditional IP PBX or a premises-based IP PBX, which is a VoIP PBX system that is housed physically in the office and connects phones over your office’s local area network, often using the same web network as your office computers. Typically, setup is cheaper, but the quality of your calls depends on your internet speed.

“VoIP uses the internet to transmit the audio from the caller to the call recipient, which eliminates the need to create a physical network,” said Yaniv Masjedi, chief marketing officer at Nextiva. To learn more about Nextiva, read our Nextiva review.

To connect an on-premises PBX system to the PSTN, you need either a Primary Rate Interface (PRI) or Session Initiation Protocol (SIP) trunking service. A SIP trunking service provides additional benefits such as disaster recovery, call accounting and advanced call routing. [Read related article: What Is SIP Trunking? Do You Need It for Your Business?]


SIP trunking can be used to convert a legacy system to a cloud business phone system. To learn more, read more information about this in our cloud-based phone system guide.

An on-premises PBX requires a large capital expenditure on hardware and other equipment and continuous maintenance and updating costs. Expect to spend around $6,500 upfront on the hardware, phone, setup, and licensing fees, plus monthly service costs. 

IP PBX systems are a more budget-friendly option because they cut down on your equipment costs. They provide high-definition audio, call queuing and business-hour rules, and they can integrate with other applications like top CRM software.

Key TakeawayKey takeaway

A digital PBX is usually referred to as a “VoIP phone system.” It uses the internet to connect users and callers, and offers helpful features like call queuing and quality audio at a low price.

What is a cloud PBX?


A cloud PBX system, also known as hosted or virtual PBX, is an IP-based telephone system provided by and accessed completely through the internet. A hosted system provides all PBX features, applications, and services, and it maintains software in the cloud rather than on a server. 

Key TakeawayKey takeaway

A cloud PBX is a phone system that is supported by the internet; its software isn’t stored on a server inside your office, but in the cloud. It offers a number of valuable tools and features, including automated attendants, video conferencing and softphones.

Benefits of a hosted PBX system

These are some of the benefits of a hosted PBX system.

  • Unified billing: With cloud PBX, your phone system, applications, features, and phone service are all billed together, with automatic maintenance and software updates.
  • Geographic flexibility: Cloud PBX systems are significantly more flexible than traditional phone systems, offering advanced disaster recovery – i.e., more flexibility and resilience than a traditional phone system in the event of a disaster, like a network failure or a hurricane – and geographic flexibility that allows employees to make calls from anywhere, anytime. This allows for easy remote work for anyone in your company.
  • Budget friendliness: Cloud-hosted PBX systems also tend to be more budget-friendly than on-premises PBX systems because, like digital PBX systems, they do not require equipment or ongoing updates and maintenance. Expect to spend around $2,000 in a one-time phone cost for a cloud PBX system.
  • Scalability: Cloud PBX systems are easily scalable and generally support an unlimited number of users. Adding users is instantaneous. Setup and maintenance are typically fast and require no downtime.
  • Customization: Cloud PBX systems enable you to add and subtract features as you please. In some cases, if you have an API, you can also customize cloud PBX systems to better integrate with your other platforms.
  • Quick implementation: Since you don’t need to set up an onsite phone network, you can implement your hosted PBX system in minutes. Onsite systems, on the other hand, may take weeks to get right.
  • Low-cost support: As with most cloud-based services, hosted PBX systems come with expert teams you can reach whenever you have issues. If you were to install an onsite system, you’d have to call in experts every time you experience technical issues. That’s a lot of time spent waiting for a service that needs to be always available.
Did You Know?Did you know

Getting a business phone number is a simple process with hosted PBX systems, as there’s a wide variety of highly rated business phone system providers. Learn more about some of the top options in our 8×8 review, Dialpad review and Ooma review.

Cons of a hosted PBX system

Hosted PBX systems do have some drawbacks.

  • Equipment needs: Hosted PBX systems require some equipment to get up and running if you do not already own the necessary components. For example, you will need to purchase IP phones, which generally require an Ethernet port and a large router.
  • Internet connection needs: Because hosted PBX systems are web-based, you must have a strong internet connection for communication to run smoothly. If your internet service provider is unreliable, you will likely have a frustrating experience. Make sure your ISP is strong and reliable and can support your communication needs before committing to a PBX.
  • Security concerns: Because it’s hosted on the internet, your PBX system could be more susceptible to security breaches than a server-based system. Take the time to ask hosted PBX providers about their security measures and how they protect the system. Make sure they have both physical and network security, SIP endpoint security, toll fraud monitoring and detection, and a dedicated monitoring system that alerts you to any suspicious activity.

If you have a hosted PBX system, make sure your internet connection is stable so communication is crisp and clear. Cloud-hosted systems are also vulnerable to security breaches if the right precautions aren’t in place.

What questions should you ask before purchasing a hosted PBX system?

Hosted PBX systems are the latest entrant in the telephony market and boast appealing features for small businesses. However, a cloud PBX may not be right for you.

Questions to ask yourself before committing to hosted PBX

  • What equipment do I already have (e.g., phones, servers, Ethernet ports, or cords)?
  • What equipment will I need to purchase?
  • How much do I currently pay for my telephone services?
  • Can I save money by switching to hosted PBX? How much?
  • How strong is my ISP? Can it support a hosted PBX system?
  • What features do I need? What features do I not need?

Questions to ask the provider

  • What kind of support do you offer (e.g., 24/7, web chat or phone, setup support)?
  • Can I keep my current phone number?
  • What are the startup costs?
  • Are there any additional monthly costs?
  • If I have legacy telephone equipment, can that be integrated? How?

Max Freedman contributed to the writing and research in this article. Source interviews were conducted for a previous version of this article.

Simone Johnson
Staff Writer at
Simone Johnson is a Business News Daily writer who has covered a range of financial topics for small businesses, including on how to obtain critical startup funding and best practices for processing payroll. Simone has researched and analyzed many products designed to help small businesses properly manage their finances, including accounting software and small business loans. In addition to her financial writing for Business News Daily, Simone has written previously on personal finance topics for HerMoney Media. She was born and raised in New York City. She graduated from the University of Rochester in 2017 with a dual degree in English language media and communications and film media production. She has been a reporter for several New York publications prior to joining Business News Daily as a full-time staff writer. When she isn't writing, she enjoys community enrichment projects that serve disadvantaged groups and rereading her favorite novels.
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